Earnings Call Transcript - HBIO Q1 2020

Operator, Operator

Thank you for joining us for the Q1 2020 Harvard Bioscience, Inc. Earnings Conference Call. All participants are currently in listen-only mode. We will have a question-and-answer session later on. I will now turn the call over to our speaker today, Dave Sirois. Please proceed.

David Sirois, Speaker

Thank you, Dilem, and good morning, everyone. Thank you for joining us for the Harvard Bioscience First Quarter 2020 Earnings Conference Call. Before we begin, I would like to suggest that you take a moment and download a copy of a presentation that will be referred to during this call. The file is entitled Q1 2020 HBIO quarterly earnings presentation and can be located in the Investor Overview, Events and Presentations section of our website. Leading the call today will be Jim Green, Chairman of the Board, President and Chief Executive Officer; and Mike Rossi, Chief Financial Officer. Before I turn the call over to Jim, I will read our safe harbor statement. In our discussion today, we may make statements that constitute forward-looking statements. Our actual results and performance may differ materially from what we have projected due to risks and uncertainties, including those described in our annual report on Form 10-K for the period ended December 31, 2019, and our other public filings. Any forward-looking statements, including those related to the company’s future results and activities, represent our estimates as of today and should not be relied upon as representing our estimates as of any subsequent day. Also, much of today’s call will focus on our non-GAAP quarterly results, which we believe better represents the ongoing economics of the business, reflects how we set and measure our incentive compensation plans and how we manage the business internally. The differences between our GAAP and non-GAAP results are outlined in the earnings release and the slide presentation. These documents be found on our website under Investor Overview, Events and Presentations. Additionally, any material financial or other statistical information presented on the call, which is not included in our press release and presentation, will be archived and available in the Investor Relations section of our website. A replay of this call will also be available for one week at the same location on our website at harvardbioscience.com. I will now turn the call over to Jim. Jim, please go ahead.

Jim Green, CEO

Thank you, Dave. Let me start by saying that we are really proud to see our products playing their part in the fight against COVID-19. Many of our Cellular and Molecular Technologies, such as our BTX Electroporation gene splicing products, are helping develop new treatments and our multi-well plates are helping detect antibodies. Our preclinical products play a major role also in any new treatment or vaccine before use in humans. And our recent advances in inhalation are just in time for research and development efforts against any airborne virus. So let’s go ahead and move to Slide 3 of the presentation and take a look at the highlights. Revenue from the combination of CROs and pharma was up modestly in the quarter. Academic labs were down significantly as labs shut down due to the COVID-19 pandemic. Our strict cash and cost control in the first quarter helped maintain strong cash flow and also helped pay down our debt principal by approximately $5 million. As we look forward, we’re expecting further revenue decline in Q2, recovering as the academic labs reopen in the second half. We rapidly implemented significant expense reductions to support margins and cash flow for Q2 and beyond. We continue to move to a leaner organization and operation, and we will continue to maintain strict cash and cost discipline as we continue to meet our debt obligations. Let’s move to Slide 4 of the presentation and take a look at the details of Q1. We were significantly impacted by the COVID-19 pandemic. Q1 revenue came in at $23.8 million, down $4.4 million or 15.7% from Q1 last year. Gross margin on a GAAP basis measured 54.6%, that’s 2.7% worse than last year. Non-GAAP adjusted gross margin was 54.6%, down 2.9%. This quarter had GAAP operating income of negative $3.3 million. Our adjusted operating income was a positive $500,000, so our adjusted operating margin was 2%. GAAP earnings per share was negative $0.12. Our adjusted earnings per share was negative $0.01. Our cash flow from operations was $2.9 million, and we paid down our debt principal by $4.8 million. Moving to Slide 5. Take a look at Q1 revenue by product family and customer segments. Starting with the first row of the table, our cellular and molecular product revenue, which is primarily for academic research labs, was down 15.7% worldwide as labs shut down and personnel began working from home, which impacted order processing and receipt of equipment. Reductions include $300,000 from an exit from a non-strategic product line. Looking at the second row of the table, our overall preclinical revenue was also down primarily due to the COVID-19 impact on academic research lab shutdowns. Good news, our CRO saw year-over-year growth in the quarter, driven by North America and China recovering. Also, pharma remained steady compared to last year, and we see a lot of excitement around our new inhalation products. As I said, academics and distributors were down with the lab shutdowns. And one of our large government lab customers was down $700,000 due to issues related to internal funding delays. If we move to Slide 6, let’s look at the restructuring related to the announcement we made late last year. We initiated the Connecticut manufacturing consolidation into Holliston and expect it to complete in our third quarter. We initiated downsizing of our UK operation, also expected to complete in the third quarter. The global reduction in force of approximately 10% across our entire business is almost complete. We expect annualized savings of over $4 million, phasing in primarily in the first half of 2020, and we expect one-time costs of approximately $4 million to $5 million associated with it. If we move on to Page 7, we’ll look at our reaction to the oncoming pandemic at the time. In mid-Q1, we began to see the initial effect of COVID-19 on our China customers and began to plan contingencies for what to do should it spread to other countries. During the first few weeks of Q1, we built an action plan to dramatically reduce the overall cost of the business and rapidly implemented it early enough to protect the second quarter and potentially beyond. The action consisted of worldwide reductions in work hours and compensation, reductions in force, and reductions in management compensation. All said, we expect to save approximately $3 million in the second quarter from these actions. At the same time, considering continuity of the business and employee safety, we rapidly implemented measures for safe factory operation and work from home for non-factory employees. As a result, we have stable, effective manufacturing operations up and running. Now I’ll turn it over to Mike for financials.

Mike Rossi, CFO

Thanks, Jim. On the full P&L for the quarter, as noted, revenue was down 16% due to the impact of COVID-19. This impact was felt equally across geographies in Q1, with Asia impacted through February followed by a significant impact to business in Europe and North America in March with the onset of the virus. The main driver of our growth in our original 2020 expectations was via strength in our CRO customer base, and while these customers were impacted, we are seeing strength with this customer base a month into Q2. Turning to profitability. The volume impact noted had a significant drop-through effect on gross and operating margins, given the speed and severity of the change in revenue trends. However, our continued focus on leaning out our cost base is reflected in the $1.2 million reduction in OpEx reported, and the impact of our previously announced restructuring actions will sequentially increase from Q1, given most employee notifications were within the quarter. On top of these committed actions are the additional roughly $3 million of savings in response to COVID-19, as Jim noted. We reported a $0.01 loss per diluted share due to the volume impact noted, with cash interest expense declining approximately $200,000 on the continued reduction in debt. The reported tax benefit on a non-GAAP basis is 32.6%, while cash taxes remained very low in 2020. The GAAP loss per share of $0.01 included a $1.5 million one-time cost to affect the ongoing restructuring we announced in December. Turning to the balance sheet. As noted, we paid down $4.8 million of debt in Q1, contributing to a $12 million reduction in debt since the end of 2018. Cash flow from operations improved to $2.9 million from $2 million in the prior year. We have enhanced our processes around working capital and overall cash management practices, which is benefiting us now and will support our ability to manage through the trough in revenue we expect in Q2. And we continue to make payments needed to execute our ongoing restructuring and get the cost structure right.

Jim Green, CEO

With that, I will turn it back to Jim to review the outlook for 2020. Jim? Okay. Thanks, Mike. Let me just say, over the last few weeks, we took a hard look at our liquidity and looking at what we had to work with, we felt like we were in good enough shape with our current cash reserves and how the business is running and the actions we’re taking that we really didn’t need the additional $6 million as part of the PPP loan. So we’ve already returned that to the bank. I’m glad to say that by returning that, we think we’re doing our duty and helping other companies that really do need access to that capital now. So why don’t we go ahead now and we’ll move to Slide 11 and take a look forward for the business. We expect the combined CROs and pharma revenues to continue to grow. With the COVID-19 impact, we’re expecting second quarter revenue to decrease 20% to 30% year-over-year and to begin recovering as academic labs reopen in the second half. I’m very glad that we took immediate action to offset Q2 margin impacts and continue to move to a leaner organization and operation. We expect improving gross margins and operating margins as academic revenues recover. Finally, we will maintain cash flows and meet our debt obligations while we build a leaner, more profitable business platform. Thank you, and I’ll turn it over to the operator for questions and answers.

Operator, Operator

Thank you. I show our first question comes from Paul Knight from Janney. Please go ahead.

Paul Knight, Analyst

Jim, can you talk to the businesses again as you were moving into – I kind of missed the first part of the call due to busy operators, I guess. And specifically, CROs as they left and entered Q2, pharma, and academic.

Jim Green, CEO

Okay. Yes, sorry. So I guess the real good news in all of this is that the CROs started growing actually in Q1, in spite of the COVID situation. We did see some initial delays while I think everybody was taking stock of what was happening. But the combination of CROs and pharmaceuticals continued to do well; they’re up and running with that business. I think starting initially in China, as we all saw China starting to erode on the academic side. But on the pharmaceutical and CRO side, there was some initial hesitancy, but it very quickly returned to work, and they really got up the business started repurchasing and purchasing or adding demand for our products. So overall, pharmaceutical and CROs have done well through this and continue to do well, with indications from them that they’re going to continue to require more equipment from us. It’s expanding, and we see it – of course, the U.S. was very strong in Q1. We see it growing even further throughout the year. China recovered in Q1 in that area and is expected to continue to grow strongly. Europe is a little bit slower to get started on the CRO pharmaceutical side, but we are seeing them starting to pick up somewhat, too. So all said, those customer segments of pharma and CRO we see as being in very good shape throughout this, and I think many would say probably a tailwind for that business, given what they’re working on and the need to get back to all the existing products that they were working on. On the academic side, as I said, it started in China, with order activity dramatically dropping off there. We saw – and we had – with our sales reps, and had contacted customers, academic customers in China, they were informed sometime mid to late Q1, that things were going to be slowing down as they might actually be working from home. Since then, of course, we all know that they shut down almost all of their academic operations. So in China, we saw that happen very quickly. That’s why we took immediate action to plan for any event that were to rotate around the world. In China, though, we do see that as just to fast forward a little, China is picking up – not only have they been recovering on the CRO and pharmaceutical side, they are starting to come back to work on the academic side. We are seeing more order activity there. We expect that to recover fairly quickly now. The U.S., as you know, again, the CROs and pharmaceuticals have done quite well through this for us; they have continued to demand more equipment. And you know that everything they are doing, whether it’s therapy or vaccines, has to go through the safety and toxicology testing and the formal preclinical testing that needs to be done for the release of any of those products. So that, along with our existing backlog of projects, we think is going to provide a solid outlook going forward in the U.S. in that segment. Europe has been a bit slower. And as we also know, a number of drugs that were originally being developed in Europe, some of those were transferred to U.S. operations. So that’s part of Europe being kind of sluggish on the CRO pharmaceutical side. On the academic side, Europe, like the other groups, has pretty much shut down. I will tell you, though, that in the last few weeks, we have started to see some initial order activity starting to develop. We’re in close contact with them. We know by site; we have a rough idea of what their expectations are regarding when their labs will reopen. So I don’t know – sorry, I don’t know exactly what you missed, but I hope that gives you some flavor. Feel free to – if there’s something you think I missed, let me know, Paul, anything else.

Paul Knight, Analyst

Okay. And then basically, you think your academic sector may be bottoming now but not necessarily recovering.

Jim Green, CEO

I think at this point, we saw academia – we saw the order intake drop precipitously as you got into mid- and late Q1; we expect that it’s pretty much at that low level now. And that run rate is what we see going into Q2. We think we’ll see sequential improvement off of that as pretty much lockstep as the labs come back to work. When the folks went home, the labs shut down, order intake really dropped off. Even shipments had to drop off because there was nobody there potentially to unpack the equipment. And I will say that one of the things – proactive actions we took right away, even in – by mid-Q1 – later into Q1 is I’d ask that each of our – before anything shipped to an academic lab that we make a phone call to ensure that there were people there to receive the product, because the last thing you want is shipping something to somebody who’s not receiving it; that can create problems. Regardless of whether you’re on FOB on rev rec, it’s a bad situation if you’re shipping and they’re not receiving it, it just goes bad. So what we did is make sure that especially when we knew it was going to an academic customer, we wanted to ensure that they were there. I’d rather take the hit and slow down on the shipments now than have it go back on your freight forwarder later on and create a problem. So we’re pretty confident that’s where it is. And again, I think to your base question, this lower run rate coming out of Q1 is what we’re modeling into Q2. We believe it’s going to start to recover here. But we’re saying we’re assuming we’re probably into Q3 for that recovery because we know it’s going to take time for people to get back and restart the order process. In the meantime, we took advantage of a lot of digital marketing. We’ve been holding webcasts with large groups of customers about the newer technologies, getting – even though they’re sitting at home maybe bored, they’re looking for something to do. So being able to work with us and look at the new products coming out so that when they get back to the office, we’ll have already done a lot of the prospecting, and they’re ready to start the order process again. So it really just comes down to timing on the recovery of the academic labs coming back online.

Paul Knight, Analyst

And can you talk about debt payments that are due this current quarter? I think it’s 2.8 for the year. And then, were there negatives associated with these government programs as well, like restrictions, etc.?

Jim Green, CEO

Well, I guess, first, on the debt, we have our ongoing interest rate payments, which we certainly expect no problem at all. There will be some additional required payments as part of the covenants, which, of course, we’re going to meet and typically, there are excess cash requirements. But the main thing is we’re going to make sure we meet our debt obligations, and we’ll work very hard to avoid any kind of covenant issues. As far as the government loan stuff, I would say the government loans that we were able to take advantage of in Europe, there were some really nice programs where they’ll help offset OpEx for someone who’s maybe working part-time. That’s very helpful. In the U.S., we looked at it; certainly, originally, when it became available, we thought it made sense to go ahead and get the application in. We had no idea if we’d get the loan, but we did get it. We applied in good faith and certainly, we feel like we had every reason to use it as it was designed. But as it became clear that they were running out of money, it just made sense for us to return it. I believe that if we could do it without taking money from U.S. taxpayers that could be used elsewhere, and if we can get by without it by really managing the business, that’s what we’re going to do. So we went ahead and returned it, I think, late last week. I think that came out in an 8-K just recently. It was our opinion that we just didn’t need it, and we can get by without it; we know how to run the business.

Paul Knight, Analyst

Okay, thanks Jim.

Operator, Operator

Our next question comes from Lisa Springer from Singular. Please go ahead.

Lisa Springer, Analyst

During your comments, you mentioned that you’re seeing some interest in your insulation-type products. Could you give us some more color around that? Like what are the insulation-type products and from what customer segments are you seeing that demand?

Jim Green, CEO

Sure, sure. We were working on this for a while, and it’s kind of opportunistic that we were able to launch the product just before this started. In the past, the way you measure inhalation load is you try to track – you try to understand how much you’ve delivered to someone, but you can’t really tell exactly. The new designed product is able to not only measure what was delivered, but we can also measure the response to it. So when you think about a disease that works its way into the lungs, knowing at what point how much of a viral load is going to actually infect and then how the lung is going to respond after that in terms of the efficiency of the lungs, and then how that viral load works its way into the subject. The timing on this was perfect. There really wasn’t a way to do this in the past to understand and quantify viral load in real-time. We’re measuring the aerosol and can respond and correlate that with whatever measurements they’re taking related to that subject. So we immediately started to see interest from China. We’re selling them now. They’re up and running, and their interest spans across the board. Since many of the academic labs are still shut down, the interest there has been more through phone calls, emails, and verbal communication. But when it comes to pharmaceuticals and CROs, they’re up and buying, and we think this is going to be – we’ve already seen quite a bit of growth in those shipments, and we expect that to continue to grow.

Lisa Springer, Analyst

Okay, great. And a big part of the Q4 story was the impact from low-margin portfolio rationalization. Is that process essentially complete?

Jim Green, CEO

It pretty much is. It’s close. Much of these – yes, I think, yes, it’s pretty well through. I mean we’re at the portfolio that we believe is going to be successful going forward. We’re putting more investment into certain areas that we know are going to have tailwinds, things like anything CRISPR-related with the BTX line. We’re adding a new line to that to be able to go after multiple uses of it. We’ll be looking at more higher volume versions on the cellular side, some of the things that we’re doing on how to use the multi-well plates, which are highly used in antibody detection. We see that growing. We’re going to make more investments there. And then just the general preclinical side, I mean just everything has to go through the preclinical testing phases, which means utilization of our implantable telemetry devices and systems and expansion of that space. So in many ways, this is going to force us to really look at where the tailwinds are, invest there, and look at where there may not be a lot of strategic value going forward and create savings there.

Lisa Springer, Analyst

Okay, great. And actually, that leads to another question. The implantable telemetry devices you were going to start shipping in Q1. Did that actually happen? And did that impact Q1 revenues?

Jim Green, CEO

Yes, it did. We did start shipping in Q1. We were held up with – it took a while to get production lines up to full rate. At this point, I think we’re running at a good pace. I don’t know that we’re – I think we’re meeting all the demand. But anyway, there’s no real problems with it. It did launch, and it’s a great, new, exciting product.

Lisa Springer, Analyst

Yes, for sure. Okay. And one last question, which might be more for Mike. If we go with the assumption that second quarter revenues are going to be down between 20% and 30%, and given the expense reductions you talked about, how should we think about gross margins in the second quarter? Will they be similar to Q1?

Mike Rossi, CFO

There will be a little bit of downward pressure there. A lot of the savings that we’re taking is going to go through the OpEx line. So just with that type of volume decline, there’ll be a little bit of negative pressure on gross margin. But net-net, you’ll see our operating margins and operating profit get back to kind of normal run rate levels that we’ve been at recently because we’ve taken such aggressive cost actions.

Jim Green, CEO

Yes. Lisa, we tried to size. We looked hard at what we thought the potential operating profit impact might be on a revenue reduction, if that were to occur and we were to see some further erosion. And so that’s how we have a target of what kind of expected savings we felt we really needed to generate to maintain our ability to have good gross margins and operating margins and continue to cash flow properly and keep the business running well. And as we come out of Q2, we’re going to know if things are – how fast they are coming back. And we’ll figure out – and certainly, we can – if there’s one thing we know how to do is to manage our cost structure and to manage it well within the revenue we have. And with Q1 happening so quickly, there’s not a whole lot you could do in a matter of a few weeks, but even with a few weeks’ notice, we were able to put things in place to ensure that we preserve Q2 and are in a position to improve and lean the business going forward.

Operator, Operator

Our next question comes from Bruce Jackson from Benchmark. Please go ahead.

Bruce Jackson, Analyst

I wanted to talk about the academic market here briefly. So a lot of schools sent their students home for the rest of the year. There’s still some debate as to whether things are going to open up again in the fall. Can you tell us a little bit about your customer base? And do these researchers have projects that are fully funded? Do you think that they’re likely to start up again with their projects in the fall? Can you give us kind of a sense of how stable that revenue stream might be and how fast it might come back?

Jim Green, CEO

Sure. Yes, I can tell you that, certainly, as we all – as you all know, the budgets had already been set. So the researchers and the labs had pretty good budgets coming in. We also know that NIH has expanded the amount of budget sent and spendable by these academic research labs. So we’re excited to see them get back to work. As far as the school year and such, the bigger impact for us is that the researchers come back; that’s not so much their helpers and students, but the actual academic researchers. As soon as they can be back in their labs, we believe that’s going to begin to drive sequential growth in revenues as we manage our spend rate and costs of the business. As that continues, we expect to see growth and improvement in operating leverage. We’re excited about this and see a positive future ahead.

Bruce Jackson, Analyst

Okay. That’s great. That’s very helpful. And then just a quick question on the income statement. Where do you think you can get the G&A expense down to over the remainder of the year?

Jim Green, CEO

That’s a good question. I think if you – it’s kind of hard to answer at this point specifically. I can tell you that if you look at the cost reductions that we’ve loaded in, we expect to see those throughout Q2. It will be the culmination of the RIF actions, the restructuring actions that started last year. Much of that now will be in our run rate spend for Q2, along with the additional $3 million of actions we’ll be seeing. As we come out of this, we’re going to be careful to ensure that we don’t add to our spend unless there’s additional revenue that demands it. There are some things we’ll look to do as people start to come back full time; that will also be timed with growth in revenue. So we’ll be matching that to make sure that we keep our drop down and our ability to run the business, our ability to generate solid operating profits and operating margins. So we’ll continue to manage the costs along with the revenue we know is coming in and make sure that we’re building a much leaner platform as a business.

Bruce Jackson, Analyst

Okay. And then last question for me. Do you have any other new products that are set to launch later this year?

Jim Green, CEO

Actually, there are a series of new products that have been in work and we’ll be launching them. We’re adding – with the advent and the need to search for antibodies, we think that’s going to be moving forward, and that’s going to be a long-term need, not just for this particular disease, but for many more. Some of our products that are associated with that, with the plate readers and multi-well products that isolate and measure antibodies, we see that as a growing area, and we’re putting a lot of effort into that. The clinical side has a real opportunity for growth as well. Everything associated with electroporation and CRISPR, we’ll be expanding that product line to do more beyond just academic research labs and finding applications for CROs and pharmaceuticals. So overall, those are probably the main areas where you’ll see more movement.

Bruce Jackson, Analyst

Okay, great. Thank you very much.

Operator, Operator

Thank you. I show no further questions in the queue. At this time, I’d like to turn the call back to Mr. Jim Green, CEO, for closing remarks.

Jim Green, CEO

Okay. Well, thank you again for joining us. It’s been a tough few weeks, a couple of months. But I hope you know that this team – we have the right team in place here to manage this business. The turnaround continues. I think as we get to see our customer labs come back online, that will continue to drive sequential growth in revenue as we manage our spend rate of the cost of the business. As we keep that down and we get that additional revenue, you’ll see better operating leverage. We’re excited about this, and I think the future looks promising; we’re excited to take this business to the next level and get through this year and into 2021. So thank you very much for your time. Have a good evening. And everybody, please be safe.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.